Is there a price to having principles?
The best-performing stocks since 1900 have been tobacco in the United States and alcohol in the United Kingdom, according to a review co-authored by Elroy Dimson, chairman of the Newton Centre for Endowment Asset Management at Cambridge Judge Business School.
Investors are under growing pressure to exercise responsible investing, but a review of the rationale, costs and benefits of responsible investing, issued today in the 2015 Credit Suisse Global Investment Returns Yearbook, suggests that “sin” can sometimes pay. Drawing on stock market returns since 1900, the study confirms that investments in sectors and countries some consider unethical have tended to outperform over the long term and more recent past.
The authors also highlight that a responsible investing strategy based on ethical screening of sin stocks may unavoidably contribute to this outperformance. Dimson illustrates this paradox:
If a large enough proportion of investors avoid sin businesses, their share prices will be depressed, thereby offering the prospect of elevated returns to those less troubled by ethical considerations. Therefore, ironically, responsible investors may be partly responsible for the higher returns from sin.
The authors report that the expected financial impact of modest exclusions is generally small. They find that use of “voice” (engaging in dialogue to bring about change) as an alternative responsible investing strategy can pay, whether the focus is on environmental and social issues or on corporate governance. Engaging with companies owned by the investor is shown to be profitable in a number of cases, especially when action is coordinated with like-minded activists. The authors commend a strategy of rotating engagement across a range of businesses. When active owners influence corporate behaviour for the better, financial performance also tends to be better.
The report was published by the Credit Suisse Research Institute, in collaboration with London Business School. The three authors – Elroy Dimson, Paul Marsh and Mike Staunton – all share an affiliation with London Business School, where Dimson is Emeritus Professor of Finance.